Why Life Insurance is Critical for Small Business Owners
Small businesses are thriving, with the U.S. Census Bureau reporting a record-breaking 5.5 million business applications in 2023 [1]. As entrepreneurs navigate the complexities of launching and growing their ventures, from securing clients to managing finances, a critical aspect of business planning is often overlooked: life insurance. Alison Salka, senior vice president at LIMRA Research, emphasizes the importance of this coverage for protecting both personal and business interests.
The Risks Without Life Insurance
Life insurance serves as a financial safety net for small business owners. Without adequate coverage, the unexpected death of an owner or a key team member can jeopardize a company’s future. Families may struggle to manage day-to-day operations while dealing with grief. Life insurance can prevent business liquidation, handle estate taxes, provide income for loved ones, and ensure the continuation of operations.
Furthermore, specific types of life insurance can solidify agreements about ownership and the fair distribution of shares among partners.
Types of Life Insurance for Small Businesses
Understanding the different life insurance options can help small business owners make informed decisions.
Individual Life Insurance
For sole proprietors or those without employees, an individual plan like term life insurance may be sufficient. This option can meet the needs of your family if you are the primary breadwinner. Salka states that individual life insurance is popular among small-business owners, as it simultaneously addresses personal and business needs. This enables you to ensure adequate coverage for your family’s debts and living expenses, especially if they rely on your business income.
Key Person Life Insurance
Also known as key man insurance, key person life insurance protects a business against the loss of an important employee who has unique skills. These individuals might be the CEO, a skilled developer, or a spokesperson. This insurance provides time to maintain the value of your business if you lose an important team member. Key person life insurance can pay for employee recruitment and training costs or replace lost business income.
Buy-Sell Agreements
A buy-sell agreement clearly defines the transition of ownership if a partner dies, retires, or becomes disabled. This contract allows co-owners or key employees to buy out a deceased owner’s stake in the business. Business partners may take out life insurance policies on each other as part of a buy-sell agreement to ensure they have the financial resources for the purchase.
Group Life Insurance
Businesses of all sizes can provide group life insurance as an employee benefit. Salka notes that these policies can be cost-effective for both business owners and employees, as employer-paid premiums are tax-deductible in some instances. Group plans often offer coverage to a wider range of people, regardless of pre-existing medical conditions. Furthermore, an additional perk such as group life insurance can help retain top talent.
How to Get Life Insurance as a Small Business Owner
A 2024 study by Life Happens and LIMRA found that nearly three out of four U.S. adults (72%) overestimate the cost of life insurance [2]. In reality, a healthy, non-smoking 40-year-old man might pay as little as $334 a year for a 20-year term policy with a $500,000 death benefit, according to Covr Financial Technologies.
To obtain life insurance, follow these steps:
- Determine Coverage Needs: Accurately assess both your personal and business expenses to determine the financial support your family or business would require in your absence.
- Choose a Policy Type: Consider your business size and how ownership should be handled after your death. Options include individual policies, buy-sell agreements, key person insurance, or a combination of plans. Consider working with a business attorney for complicated situations to obtain guidance and protect your interests.
- Compare Quotes: Get quotes from multiple insurance companies online or over the phone. Agents or brokers can help you find coverage and negotiate favorable terms.
Salka emphasizes that understanding your business coverage requirements is key to a small business continuity plan, regardless of chosen coverage levels. Planning ahead for your family, heirs, and business can provide comfort and confidence in your long-term strategies.
Conclusion
Life insurance is not merely an expense; it is an investment in the future of your business and the financial well-being of your family. By understanding the types of policies available and taking the necessary steps to secure coverage, small business owners can mitigate risks and ensure a smooth transition should the unexpected occur.
[1] U.S. Chamber of Commerce. Map: New Business Applications Surge Across the Country. Accessed Jul 11, 2024. [2] LIMRA. U.S. Life Insurance Need Gap Grows in 2024.
